ch22 - Chapter 22: Research and Development 1 Research and...

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Unformatted text preview: Chapter 22: Research and Development 1 Research and Development Chapter 22: Research and Development 2 Introduction Technical progress is the source of rising living standards over time Introduces new concept of efficiency Static efficiencytraditional allocation of resources to produce existing goods and services so as to maximize surplus and minimize deadweight loss Dynamic efficiencycreation of new goods and services to raise potential surplus over time Schumpeterian hypotheses (conflict between static and dynamic efficiency) Concentrated industries do more research and development of new goods and services, i.e., are more dynamically efficient, than competitively structured industries Large firms do more research & development than small firms Chapter 22: Research and Development 3 A Taxonomy of Innovations Product versus Process Innovations Product Innovations refer to the creation of new goods and new services, e.g., DVDs, PDAs, and cell phones Process Innovations refer to the development of new technologies for producing goods or new ways of delivering services, e.g., robotics and CAD/CAM technology We mainly focus on process or cost-savings innovations but the lines of distinction are blurreda new product can be the means of implementing a new process Drastic versus Non-Drastic Innovations Process innovations have two further categories Drastic innovations have such great cost savings that they permit the innovator to price as an unconstrained monopolist Non-drastic innovations give the innovator a cost adavantage but not unconstrained monopoly power Chapter 22: Research and Development 4 Drastic versus Non-Drastic Innovations Suppose that demand is given by: P = 120 Q and all firms have constant marginal cost of c = $80 Let one firm have innovation that lowers cost to c M = $20 This is a Drastic innovation. Why? Marginal Revenue curve for monopolist is: MR = 120 2 Q If c M = $20, optimal monopoly output is: Q M = 70 and P M = $70 Innovator can charge optimal monopoly price ($70) and still undercut rivals whose unit cost is $80 If cost fell only to $60, innovation is Non-drastic Marginal Revenue curve again is: MR = 120 = 2 Q Optimal Monopoly output and price: Q M = 30; P M = $90 However, innovator cannot charge $90 because rivals have unit cost of $80 and could under price it Innovator cannot act as an unconstrained monopolist Best innovator can do is to set price of $80 (or just under) and supply all 40 units demanded. Chapter 22: Research and Development 5 Drastic vs. Non-Drastic Innovations (cont.) Innovation is drastic if monopoly output Q M at MR = new marginal c exceeds the competitive output Q C at old marginal cost c $/unit = p Quantity c Q C c Q M Demand $/unit = p c P M Q C Q M Demand c P M Drastic Innovation : QM > QC so innovator can charge monopoly price PM without constraint NonDrastic Innovation...
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ch22 - Chapter 22: Research and Development 1 Research and...

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